Law

The earnings stripping rules of IRC Section 163(j) may be applied to affiliated groups of corporations that file consolidated tax returns and to other affiliated groups as indicated by Proposed Regulations issued on Jun 13, 1991. Section 163(j) forbids corporations to deduct interest paid or accrued to a related tax-exempt person beyond a limit of 50% of the corporation's adjusted taxable income along with any excess limitation carryforward. Application of Section 163(j) to a corporation requires several conditions such as a ratio of debt to equity greater than 1.5:1.

The restructuring of corporate debt leads to tax consequences. This applies to both cash-for-debt exchanges, in which debt is retired for cash at a discount, and debt-for-debt exchanges, in which old debt is exchanged for new debt. One issue to consider in cash-for-debt exchanges is the exclusion of cancellation of debt income from gross income. Debt-for-debt exchanges are taxable except for cases in which they qualify as tax-free recapitalizations.